By Daniel Rinke, CCH Washington Staff Writer

During an effort to improve customer service over the last few years, the Internal Revenue Service (IRS) admits its enforcement activity has fallen off. But steps are being taken to remedy this situation, according to IRS Commissioner Mark Everson, who spoke at the Annual Federal Tax Association Conference held in Washington, DC on March 26, 2004.

Everson also estimated that overall filing is up 2 percent so far, as compared to the same point last year, and that e-filing has made significant progress. According to IRS statistics, 53 million taxpayers filed their returns electronically last year. Everson noted that e-filing is 11 percent higher than it was at the same point last year and that the IRS expects the total number of e-filers to top 60 million this year, representing almost half of all individually filed returns.

Everson added that this will reduce processing burdens on the IRS because e-filed returns tend to be more reliable and accurate, reducing errors and the blizzard of paperwork with which the IRS is faced.

Such service gains came about as a result of the 1998 IRS Restructuring and Reform Act, but Everson noted that enhanced customer service came at the expense of enforcement and that the IRS must now take steps to repair that damage. Over a five-year period beginning in 1997, the IRS, as it began to focus more on customer service, drew down its enforcement staff--cutting agents, revenue officers and criminal investigatory staff by over 25 percent each. The results were disastrous. Lacking the agents, revenue officers and criminal investigators, audits rates and investigations fell dramatically and tax shelters proliferated. In addition, Everson observed that DOJ prosecutions were down 50 percent from normal levels.

The decline in audit rates and proliferation of tax shelters exacted a very heavy price. Everson said that the number of taxpayers surveyed who feel that cheating on one's taxes is permissible rose from 11 percent in 1999 to 17 percent in 2003. And while the IRS successfully collects well in excess of $2 trillion in tax revenue annually, Everson estimated that there is likely another quarter of a trillion that escapes collection.

In closing the enforcement gap, the IRS is continuing to focus on four key strategies:

• Discourage non-compliance by curbing corporate and high-income taxpayer participation in abusive tax shelter transactions
• Ensure that those entrusted with operating within the tax system, namely attorneys and accountants, adhere to professional standards and follow the law
• Detect and deter domestic and offshore criminal tax activity
• Curb the abusive use of tax-exempt entities

Everson called such abuse of tax-exempt status particularly disturbing because these organizations purport to be operating to serve a social good and continued abuse could undermine support for legitimate charities.

Everson noted that enforcement efforts have already started to pay off. Recently released enforcement statistics indicate that there is a 50 percent increase in the audit rate regarding high-income tax payers. Everson added that criminal investigations and collections are also on the rise. To augment these efforts, the President has asked for a 5 percent budget increase for the IRS in FY 2005, providing a 10 percent boost to current enforcement funding levels.

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